Notes From the Rabbit Hole is a reality-based financial market service with a critical contrary perspective: “Before NFTRH I used to feel a bit like Agent Starling in Buffalo Bill’s basement after the lights went out. Thanks for turning on the lights.” –JM

NFTRH Interim Update 4.24.13, Precious Metals Mid-Week View

Given that the gold-silver ratio continues to rise (implying a coming liquidity contraction) and gold vs. the CCI commodity index tanked to the weekly EMA 300 and bounced (per chart from NFTRH235’s opening segment and this post), I continue to favor gold over silver and commodities.

Gold Silver ratio, weekly chart from NFTRH 230

Why “favor” a metal that has crashed? After all, everybody hates gold right now. Exactly. The pervasiveness of the negative perception is about as good as it gets even if there remains some price vulnerability.

Silver is more vulnerable, with a valid target below 20 looking more likely the longer it dwells below 26. We must respect this situation, but also realize that everybody sees how bearish silver looks. Everybody. I wonder if TA that everybody sees will do exactly what everybody seems to expect.

Silver daily chart

Here is the weekly view again, for perspective. Technically, we should continue to view this as targeting sub-20 as long as Ag remains below 26. That is the raw TA view.

Silver weekly, from NFTRH 230

Here is the daily chart of gold showing a hard snap back to last week’s plunge. This has brought gold up to a point that corresponds with the 200 week moving average (at or about 1440) that we noted in NFTRH 235’s opening segment and this post by a weekly chart.

Gold daily chart

1440 was an expected hesitation or resistance point for any rebound, but there is an element that we should keep in mind through this difficult time and that is a realization that powerful bull reactions can come from uniform sentiment and embedded perceptions that all is bleak and not going to improve any time soon.

It is not bleak. Gold has for centuries been an anchor used by people to keep their ships from sailing into dangerous waters. That is all it is. All the noise about the paper market vs. physical inventories and sovereign repatriation, etc. is just that. Gold is fine and this will be sorted out in due time, which could be sooner than many people expect.

It is important to remember that gold is not going down right now. It never goes anywhere because it is an asset that remains of constant value. Gold’s price crash is a reflection of what is going on around it, including whatever manipulative operations may be at work *. But keep in mind that global macro parlor tricks can severely upset the short-term, but in the long-term, things are what they are. It is the financial system that is in flux, not gold.

Also consider the idea that gold ownership is being transferred. I do not believe for one minute that many of the large and privileged entities putting out negative research on gold are not profiting from its price demise while planning to profit even more from a future rise. Unfortunately, that is how the game is played. It sucks, but it is what it is.

DIA-Gold ratio, monthly

I continue to believe that this is a phase where even some of the stoutest gold bugs are made to believe their time has passed. The ‘great rotation’ has not been out of bonds and into stocks, but out of gold and into stocks. The above chart continues to be a compelling picture of a technical condition (imagine that, peoples’ financial lives hinging on a technicality) that almost had to be as the DIA-Gold formed a bottoming pattern, targeted .11 and achieved it. The dynamics in play that created this condition are culling out weak investors from the gold market. It is a process and it is business as usual for the markets.

* While there is obviously coordinated manipulation in the gold market, do not discount the shear power of uncommitted gold bugs and trend following hedge funds now selling out their paper gold from the ETFs, futures, etc. (i.e. puking). This is probably where the real downside pressure has been of late.

GDX daily

As we have noted, one of these days the gold stocks are going to stop making bear flags or they are going to make one that fails to do what everybody now knows it is supposed to do. This is the conditioning in this most infernal sector. There is talk about ‘all-in’ costs marginalizing many gold miners due to gold’s decline and many projections for lower prices to come.

Technically, we have HUI 250 (basically registered), low 200’s (secular trend line) and 100 (measured target off of a massive topping pattern). That is the TA and it should be respected. But writing now as just another player with a perhaps active imagination, I wonder about the potential for a new bull market that could one day come out of this angst. It may come from HUI 100, 200 or 250 but I think it is coming because I believe the values assigned to gold within a dysfunctional financial system stand to be higher in the future and I think the ‘real’ price of gold as measured in mining cost-input commodities stands to be higher as well.

What would cure the talk about gold miner ‘all in’ costs? An impulsive recovery by gold from a phase that has been historic (at least dating back to the mid-70’s, and the storied slicing of gold in half prior to the best part of its bull market). Meanwhile, the chart is the chart and GDX above shows another potential bear flag with uninspiring volume. This type of condition has fueled new plunges throughout a series of bear flags.

I have no positions, but am watching closely. If I see something that looks like it could negate the latest potential bear flag, it will be updated as soon as possible. Meanwhile, the job – with respect to the precious metals – is as it has been. Be intact first and ready for opportunity second.

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